398 ASIA-PACIFIC TAX BULLETIN
PHILIPPINES
Is There Double Taxation in the Philippine
Tax System?
Dr Angel Q. Yoingco and M.A. Lourdes B. Recente
Dr Angel Q. Yoingco is the Chairman of the Board of the
Public Finance Institute of the Philippines, Dean Emeritus of
the Lyceum of the Philippines Graduate School and Trustee,
Board of Trustees of the University of the East Foundation
for Research and Advanced Studies Inc., Manila.
M.A. Lourdes B. Recente is the Director of the Research
and Information Office, Department of Finance, Philippines.
1. INTRODUCTION
It was one of those taxpayer registration and filing dead-
lines of the Philippines Bureau of Internal Revenue (BIR)
when, at two oclock in the afternoon, someone became
frantic about the presence of BIR personnel at his office
premises asking him and his co-workers to hastily register
as value added tax (VAT) taxpayers. It was the last day of
registration for new VAT taxpayers and the person, being a
licensed professional insurance broker, was told to register
as he would now be covered by the value added tax.
Because of the imposition of the VAT on professionals as
of January 2003, the issue of double taxation has gained
interest and focus. To professionals, their value-added
upon which the VAT is levied, is measured by their gross
income that is likewise subject to the income tax. Many
professionals have questioned the legality and fairness of
subjecting their gross incomes to two taxes. Isnt this case
of taxing the same income twice excessive and burden-
some, and thus, unconstitutional?
This paper reviews some writings from the vast economics
and public finance literature written on double taxation
and Philippine jurisprudence on double taxation cases, and
discusses possible or perceived double taxation issues in a
Philippine setting.
2. DOUBLE TAXATION DEFINED
When the same taxable item is taxed more than once1 by
either the same or by different government agencies,2 there
is said to be double taxation. As described in literature,
double taxation can either present itself in a juridical or
an economic form.3 The juridical type of double tax-
ation happens when comparable taxes are imposed by two
or more taxing jurisdictions on the same taxpayer in
respect of the same taxable income or capital.4 It may be
viewed from a domestic context involving two equal and
sovereign taxing jurisdictions in one state or from an inter-
2003 International Bureau of Fiscal Documentation
NOVEMBER/DECEMBER 2003
national context wherein two or more countries impose
taxes on the same taxpayer on the same tax base. The lat-
ter is observed in the case when income arising from a for-
eign investment is subject to tax in the source country and
taxed once more upon repatriation in the country of resi-
dence of the investor-taxpayer.
To mitigate domestic and international double taxation,
unilateral, bilateral or multilateral relief measures may be
taken. Unilateral relief measures are often found in the tax
laws of a specific country. Bilateral or multilateral meas-
ures are in the form of tax treaties for the avoidance of
double taxation that are aimed to allocate the taxing rights
on income arising from international transactions between
the countries involved.5 Tax treaties are generally pat-
terned after model tax treaties of the OECD and the UN.
Economic double taxation, on the other hand, occurs when
more than one person is taxed on the same item of income.
An often-cited example is the taxation of corporate
income at the level of the corporation and at the level of
the shareholder when distributed in the form of dividend.
This is essentially founded on the classical corporate tax
system wherein the corporation is treated as a distinct and
separate entity from the individuals who own the corpor-
ation. To relieve economic forms of double taxation, the
integrating of the income taxes paid at the corporate and at
the personal levels, through various methods, has been
adopted in some countries. Integration refers to any plan
that taxes corporate income only once, instead of twice,
both when earned and when distributed to shareholders.6
One variant which is full integration attributes all incomes
of the corporation to the individual owners and collects the
income tax due only from the individual owners at rele-
vant rates depending on their total incomes, while a more
limited form is confined to the taxation of corporate
income that is paid out as dividends to shareholders.7 Lit-
erature also terms it the conduit concept or theory where
qualifying investment companies are allowed to pass on
1. International Bureau of Fiscal Documentation, International Tax Glossary
Second Edition, IBFD Publications, Amsterdam, 1992, p. 80.
2. Patterson & Scholz, Economic Problems of Modern Life, McGraw-Hill
Book Company, Inc., United States, fourth ed., 1948, p. 349.
3. IBFD, id.
4. IBFD, loc. cit.
5. IBFD, p. 81.
6. Glenn Hubbard, Integration, corporate tax, in The Encyclopedia of Tax-
ation and Tax Policy, Joseph J. Cordes, Robert D. Ebel and Jane G. Gravelle,
editors, The Urban Institute Press, Washington D.C., 1999, p. 197.
7. John R. King, Integration of Personal and Corporate Income Taxes:
Advantages and Disadvantages, in Tax Policy Handbook, edited by
Parthasarathi Shome, International Monetary Fund, Washington D.C., 1995,
pp. 151-152.
NOVEMBER/DECEMBER 2003 ASIA-PACIFIC TAX BULLETIN
interest, dividend income and capital gains to shareholders
without incurring a tax liability and so as to avoid double
taxation.8 A common approach to relieve double taxation
of dividend income is the imputation system.9 It allows
shareholders to claim a credit for taxes paid by the com-
pany against their personal tax liability for dividends
received.
3. DOUBLE TAXATION IS NOT FORBIDDEN
In Philippine jurisprudence, double taxation has been
described as direct duplicate taxation. It exists where the
same property is taxed twice when it should be taxed once,
or the same person is taxed twice by the same jurisdiction
for the same reason. Double taxation is not specifically
forbidden in our fundamental law. Several Philippine
cases cite that the Philippines has not adopted the injunc-
tion against double taxation found in the Constitution of
the United States.10 Further, the Court has ruled that there
is no double taxation where the state merely imposes a tax
on every distinct and separate business in which a taxpayer
is engaged.
Nonetheless, there are inherent limitations on taxation11
and one of these is that there should be no double tax-
ation. Double taxation, in this context, refers to taxation
that is excessive and burdensome. While there is no spe-
cific prohibition against double taxation in the fundamen-
tal law of the land, the 1986 Philippine constitution
requires that the rule of taxation be uniform and equitable
to prevent undue discrimination and the imposition of
excessive taxes. By implication, double taxation if
allowed may violate public policy against excessive
taxes.12
Double taxation, it is likewise treatised, also exists where
a tax is not generally applicable such that one would be
taxed more than another.13 When not generally applied to
all subjects, it would be contrary to the constitutional guar-
antees of uniformity of taxation and equal protection.
Double taxation that is generally applied results in an
increase in tax, which is legal and permissible. It was like-
wise argued in literature that if all (property) were equally
subjected to two or more taxes, the injustice of double or
multiple taxation would not be so pronounced.14
4. TWICE TAXED, TWICE PAINED?
In the Philippine tax system, instances abound where the
national and local governments apparently tax the same
earnings or property more than once. Could these be bla-
tant examples of double taxation that government itself
practices and tolerates, maybe for the pressing need to
raise tax revenues, or are these instances of double tax-
ation where taxpayers are made to bear the pain of tax
twice over?
Case No. 1 VAT, professional tax and local business tax
An individual who practises his profession is liable to pay
VAT15 to the national government, and professional tax16 to
the province. Both taxes are imposed on a professional
2003 International Bureau of Fiscal Documentation
399
person for the single reason that he is in the business of
exercising his profession. In the case of businesses such as
manufacturing, retail and wholesale trading, financial
intermediation, agricultural milling, etc., these are subject
to VAT at the national level and to the local business tax17
payable at the municipality or city level. Both taxes are
levied on the same tax base, which is gross sales or
receipts. Like the professionals, these businesses pay a tax
to both the national and local governments for the reason
that they are conducting a going concern.
In these twin examples, the common denominators are: (i)
the imposition of a business tax on the same taxable base,
(ii) the imposition of a tax for the same reason, and (iii) the
imposition by two sovereign levels of government. Is this
validly a case of double taxation? Strictly on the basis of
definition, there is duplicate taxation of professionals and
businesses in these instances. But since both taxes are
founded on the basic tax laws,18 there should be nothing
illegal about them. Local governments are allowed to levy
taxes, fees and charges subject to the limitations set by the
Local Government Code (LGC). The imposition of a busi-
ness tax by the province or the municipality and city on the
same tax base, which is gross sales or receipts similar to
the business taxes imposed at the national level, is not one
of the limitations contained in the LGC. Vesting local gov-
ernments with adequate taxing powers is along the spirit of
local autonomy and fiscal self-reliance. The local tax
rates, though, are substantially lower than the national
imposition, which should make taxation less harsh and
painful to a professional or to a business.
Case No. 2 Community tax
Another imposition by the municipality and city is based
on income and property, tax bases that are already subject
to other taxes such as the income tax and VAT at the
national level, and the local business tax and real property
tax at the sub-national level. This is the community tax
imposed on individuals and juridical persons using a rate
which has a fixed component and an ad valorem com-
8. www.investorwords.com.
9. King, p. 154.
10. Notes from the cases: Manila Motor Co. Inc. v. Ciudad de Manila, 72 Phil.
336; Victorias Milling Co. Inc. v. Municipality of Victorias, et al., L-21183, 27
Sept. 1968. There are many other cases in Philippine jurisprudence that tackle
double taxation, such as Pepsi-Cola Bottling Co. of the Phil. v. City of Butuan,
24 SCRA 787; De Villata v. Stanley, 32 Phil. 35; City of Manila v. Inter-Island
Gas Service, 99 Phil. 847; Syjuco v. Municipality of Paranaque, L-11265, 27
Nov. 1959; City of Bacolod v. Gruet, L-18290, 31 Jan. 1963.
11. (i) The tax must be imposed for a public purpose; (ii) it must be limited to
persons and property within and subject to its jurisdiction; and (iii) there should
be non-delegation of the power to tax.
12. Angel Q. Yoingco and Regina Simona B. de Guzman, Public Finance and
the Philippine Constitutions, Claro M. Recto Academy of Advanced Studies,
Lyceum of the Philippines, Manila, 1994, pp. 20-21.
13. Romualdez, Yoingco and Casem, Philippine Public Finance, GIC Enter-
prises and Co. Inc., Manila, 1973, p. 323.
14. Patterson and Scholz, id.
15. A person pays the 10% VAT if his gross annual sales or receipts exceed
PHP 550,000. If not, he is liable to a 3% tax on his gross quarterly receipts or
sales.
16. An annual tax not to exceed PHP 300 that is paid to the province.
17. The local business tax rates vary by type of taxpayer; it is either a schedule
of fixed amounts or ad valorem.
18. The National Internal Revenue Code and the Local Government Code.
400 ASIA-PACIFIC TAX BULLETIN
ponent depending on income earned or assessed value of
property owned by the taxpayer.19
The community tax has its origin in the Spanish times
when a cedula tax was imposed. It was transformed into a
residence tax during the Commonwealth period and even-
tually, became known as the community tax under the
Local Government Code of 1991. It has become a per-
manent feature of the tax system and a revenue-raiser for
the local governments. More importantly, though, this tax
is also imposed when a document is acknowledged before
a notary public, when taking an oath of office upon elec-
tion or appointment in government, when receiving any
licence, certificate or permit from any public authority,
when paying a tax or fee, when receiving any money from
a public fund, when transacting any other official business,
or when receiving any salary or wage from any person or
corporation.
The community tax has often been attacked as an example
of double taxation because it is imposed on income or
property value that is also subject to other forms of taxes.
But as a minimal imposition of the local governments, it
cannot be regarded as burdensome or excessive. Can this
double taxation, then, be judged as illegal? It can be
argued further that double taxation that is generally
applied and results in an increase in taxes is permissible as
it does not contradict the constitutional guarantees of uni-
formity of taxation and equal protection.20
Case No. 3 Income tax and taxes on property such as
estate tax, gift tax, capital gains tax and real property tax
There are arguments that the taxes imposed on property,
for various reasons, result in double taxation. Income that
had already been taxed once, under the income tax system,
will again be taxed as it will have to pay for the real
property tax or the estate tax. The assets belonging to an
estate have already been subject to income tax before and
therefore, should not be taxed again.
In the case of the estate tax, gift tax or capital gains tax, the
object of taxation is the incremental value of the property
from the time of acquisition to the time of disposition.21
This appreciation in the property value escapes income
taxation, until the time when one of these taxes shall apply,
that is upon death when the heirs of a property owner
inherit and pay an estate tax, or upon disposition of a prop-
erty either by donation where the donor pays a gift tax or
by sale where the seller shells out for the capital gains tax.
Thus, these are one-time impositions on income incre-
ments that the regular income tax system does not cover.
The real property tax, which is also a tax on wealth, differs
from the other taxes levied against property because it is
recurring and paid on an annual basis.22 It is usually
imposed on a fraction of the market value of a real prop-
erty,23 and this tax base represents rental income or
imputed rental income from property that otherwise
escapes the personal income tax.24
These taxes add value and meaning to equity and progres-
siveness of the income tax system but are levied on differ-
ent representations of income. Where there is a different
object of tax, therefore, a double taxation case is
unfounded.
2003 International Bureau of Fiscal Documentation
NOVEMBER/DECEMBER 2003
Case No. 4 Income tax and dividend tax
The Comprehensive Tax Reform Program in 1997 reintro-
duced the tax on dividends into the income tax system
amidst reservation that there was only one income stream
being subjected to both the corporate tax and the tax on
dividends. It is recalled that the tax on dividends was pre-
viously abolished in 1986 together with the intercorporate
dividends tax. During Senate deliberations on the merits of
imposing a tax on dividends, the Department of Finance
argued on the basis of the following four points:25
the corporation is a distinct entity and enjoys specific
privileges such as limited life and liability;
a tax on dividends promotes horizontal equity by
ensuring that people in the same income bands who
are receiving different forms of income are similarly
taxed. While wage income was fully taxed, passive
income (like dividends) was not;
a tax on dividends promotes progressivity of the tax
system since dividend income is received by individ-
uals belonging to the two topmost income classes;26
and
a tax on dividends ensures that the corporate tax has
been fully paid on distributed dividends.
The last argument became the turning point of congres-
sional debates on the issue of double taxation of income.
While the then statutory corporate tax rate was 35%, the
effective rate was a mere 2%-8% because of deductions
and other preferential tax treatment. Thus, whether at the
corporate level or at the individual shareholder level,
corporate income was being taxed at merely 2%-8%.27
The imposition of a tax on dividends became the equaliz-
ing measure. It was re-instituted in 1998 and gradually
increased from 6% to the present rate of 10% of gross divi-
dends received.
19. For an individual, the tax is equivalent to a fixed amount of PHP 5.00 and
an ad valorem amount equivalent to PHP 1.00 for every PHP 1,000 of income
earned (salaries, income from the exercise of profession or business income) or
of assessed value of property, but is not to exceed PHP 5,000. For a juridical per-
son, the tax is equivalent to PHP 500 plus an additional tax of PHP 2.00 for every
PHP 5,000 worth of real property or gross receipts but the total additional tax is
not to exceed PHP 10,000.
20. Romualdez, Yoingco, Casem, pp. 322-323.
21. Estate taxes range from 5%-20% while gift taxes range from 2%-15%.
Please see Annex 1 for the schedules. The capital gains tax is a final tax of 6%
based on the gross selling price or current fair market value, whichever is higher.
22. Steven M. Sheffrin, Property tax, real property, residential, in The En-
cyclopedia of Taxation and Tax Policy, pp. 293-295.
23. The Local Government Code of 1991 sets the real property tax at a rate not
exceeding 1% of assessed value of real property in the case of a province or 2%
in the case of a city or a municipality within the Metropolitan Manila Area.
Assessed value is equivalent to the fair market value of the real property multi-
plied by the assessment level. Assessment levels are fixed by local ordinances
subject to ceilings set by the Code. They vary as to type of property and actual
usage, for example, residential land has an assessment level of 20% and com-
mercial land 50%, while buildings and other structures have varied assessment
levels. Please see Annex 2 for more details on the structure of the real property
tax.
24. Janet Stotsky and M. Zuhtu Yucelik, Taxation of Land and Property, in
Tax Policy Handbook, IMF, p. 181.
25. In a Memorandum dated 26 May 1997, to Senator Juan Ponce Enrile (who
was then chair of the Senate Committee on Ways and Means, and was sponsor-
ing the measure on the floor) and signed by Finance Undersecretary Milwida M.
Guevara.
26. This is based on findings of the National Statistics Office in its Family
Income and Expenditures Survey.
27. The present corporate tax rate is 32% on net taxable income while the divi-
dends tax is a final tax of 10% imposed upon cash or property dividend.
NOVEMBER/DECEMBER 2003 ASIA-PACIFIC TAX BULLETIN
Since the Philippines does not have full or partial integra-
tion of incomes to address the double taxation issue of the
corporate income tax, the imposition of a lower tax on
dividends (which is 22 percentage points lower than the
statutory corporate tax) is the next best thing. Let the
double taxation issue hounding the tax on dividends lay to
rest.
Case No. 5 Income tax and VAT
Indeed, apart from the income tax, a VAT is now imposed
on the sale of services by persons engaged in the practice
of professions like doctors, accountants and lawyers, pro-
fessional services rendered by general professional part-
nerships, services rendered by actors, etc., professional
athletes, and services rendered by customs, real estate
stock, immigration and commercial brokers.28 Since a pro-
fessionals value-added is being equated with his net
income, he claims to being taxed twice, i.e. once by the
income tax and then, by the VAT. Does he bear the pain of
tax twice?
Public finance literature explains that the VAT is a tax on
consumption, hence, the incidence of the VAT falls on the
final consumer. Not upon the manufacturer, trader or ser-
vice-provider such as a professional individual. In the VAT
chain leading to the final consumer, a VAT taxpayer-pro-
fessional, say, Mr Accountant, pays an input tax on his
purchases of supplies but charges an output tax based on
his professional fee to his client or the next person in the
chain. The output tax now becomes someone elses input
tax. However, if the next person were the final consumer,
the VAT that is passed on to him is no longer an input tax
but the final VAT burden that the final consumer has to
bear. The question that should be posed is whether Mr
Accountant actually incurred a VAT liability or not. As
seen from this simple illustration, Mr Accountant did not
pay a VAT but merely acted as a withholding agent of
the final consumer. Mr Accountants input tax is effect-
ively an advance payment for the VAT that is due to the
final consumer, and his output tax is effectively the VAT
due of his client that he is withholding for the government.
While there is no double taxation issue between the
income tax and the value added tax as far as Mr Accoun-
tant is concerned, the same may not be readily said of Mr
Insurance Broker who is now charged a VAT on his gross
income in the form of commission fees. Commission fees
are generally percentages of the price of the product being
sold (e.g. an insurance policy) that are set by the insurance
company. Unlike Mr Accountant who prices the profes-
sional service he renders and is able to pass on the cost of
his service to his client, Mr Insurance Broker receives a
fixed fee upon which he incurs a VAT that, on the other
hand, he could not pass on to the insurance buyer because
the price of the insurance policy is likewise determined by
the insurance company. Apparently, he bears the VAT even
when he is not the final consumer. But is his service not
akin to an employer-employee relationship or is it a form
of contractual business undertaking for which a business
tax should be made to apply? In the current value-added
taxation of professionals, this is seen as one grey area that
needs to be resolved. However, on the issue of whether Mr
Insurance Broker is doubly taxed, the government can
2003 International Bureau of Fiscal Documentation
401
argue that the true income tax base is not the brokers
gross income but rather a net value after deducting what-
ever expenses he has incurred in the ordinary course of
his trade or business. Hence, the two taxes being imposed
on different tax bases cannot be attacked as a case of
double taxation.
5. CONCLUSION
Beyond what literature has set forth and what jurispru-
dence has so far ruled, real-life tax situations exist where
Juan dela Cruz points an accusing finger at government for
doubly taxing him and making his life miserable. The
issue of double taxation is quite complex but interesting,
and deserves careful and objective study as well as exten-
sive public discussion. It also pays well for government to
clarify double taxation issues by way of regulation and
public information.
But while this paper highlights double taxation concerns
of the ordinary taxpayer, attention should likewise be
given to the opposite side of the spectrum where entities
escape, or manage to escape, taxation because of lax or
unclear interpretation of law. For instance, religious, char-
itable and educational organizations established and oper-
ating exclusively as such and not for profit, are exempt
from taxation. This is a constitutional mandate that is mir-
rored in specific provisions of the Internal Revenue Code.
The Tax Code, however, clarifies that income of any of
these organizations from any of their properties or from
any of their activities conducted for profit shall be subject
to tax. How this provision is actually implemented by gov-
ernment should also be examined, as there apparently exist
some organizations that earn income and profits from
investments in real estate, manufacturing, finance and
merchandising. These incomes are said to escape taxation
as they hide under the cloak of the constitutional exemp-
tion. Where there is inequity in double or triple taxation of
income, there is also unfairness when income remains
untaxed.
ANNEX 1
1. Rates of estate tax
Value of net estate (PHP) Tax payable (PHP)
up to 200,000 exempt
200,000 500,000 5%
500,000 2,000,000 8% + 15,000
2,000,000 5,000,000 11% + 135,000
5,000,000 10,000,000 15% + 465,000
over 10,000,000 20% + 1,215,000
To determine the net estate, certain deductions are allowed
from the value of the gross estate such as: (i) expenses,
losses, indebtedness and taxes; (ii) an amount equivalent
to the current fair market value of the decedents family
home up to PHP 1 million; (iii) a standard deduction
equivalent to PHP 1 million; and (iv) medical expenses
28. BIR Revenue Regulations 1-2003, 3-2003 and 11-2003 .
402 ASIA-PACIFIC TAX BULLETIN NOVEMBER/DECEMBER 2003

incurred by the decedent within one year prior to his death, (b) On buildings and other structures:
substantiated but up to PHP 500,000 only, among others. Residential
Fair market value (PHP) Assessment levels (%)
2. Gift tax or donors tax up to 175,000 0
175,000 300,000 10
Value of net gift (PHP) Tax payable (PHP) 300,000 500,000 20
up to 100,000 exempt 500,000 750,000 25
100,000 200,000 2% 750,000 1,000,000 30
200,000 500,000 4% + 2,000 1,000,000 2,000,000 35
500,000 1,000,000 6% + 14,000 2,000,000 5,000,000 40
1,000,000 3,000,000 8% + 44,000 5,000,000 10,000,000 50
3,000,000 5,000,000 10% + 204,000 over 10,000,000 60
5,000,000 10,000,000 12% + 404,000
over 10,000,000 15% + 1,004,000 Agricultural
Fair market value (PHP) Assessment levels (%)
up to 300,000 25
ANNEX 2 300,000 500,000 30
500,000 750,000 35
Real property tax 750,000 1,000,000 40
1,000,000 2,000,000 45
1. The real property tax (RPT) is an ad valorem tax that over 2,000,000 50
is levied annually by a province or city or a municipal-
ity within the Metropolitan Manila area on real prop- Commercial/Industrial
erty such as land, building, machinery and other Fair market value (PHP) Assessment levels (%)
improvement.
up to 300,000 30
2. Rate of tax: not exceeding 1% of the assessed value of 300,000 500,000 35
real property in the case of a province and not exceed- 500,000 750,000 40
ing 2% in the case of a city or a municipality within the 750,000 1,000,000 50
Metropolitan Manila area. The assessed value or the 1,000,000 2,000,000 60
tax base is computed as the fair market value of the 2,000,000 5,000,000 70
real property multiplied by the assessment level. 5,000,000 10,000,000 75
over 10,000,000 80
3. The following are exemptions from the RPT:
(a) real property owned by the Republic of the Philippines Timberland
or any of its political subdivisions except when the
beneficial use thereof has been granted, for consider- Fair market value (PHP) Assessment levels (%)
ation or otherwise, to a taxable person; up to 300,000 45
(b) charitable institutions, churches, parsonages or con- 300,000 500,000 50
vents appurtenant thereto, mosques, non-profit or reli- 500,000 750,000 55
gious cemeteries and all lands, buildings, and 750,000 1,000,000 60
improvements actually, directly and exclusively used 1,000,000 2,000,000 65
over 2,000,000 70
for religious, charitable or educational purposes;
(c) all machineries and equipment that are actually,
directly and exclusively used by local water districts (c) On machineries
and government-owned or controlled corporations Class Assessment levels (%)
engaged in the supply and distribution of water and/or agricultural 40
generation and transmission of electric power; residential 50
(d) all real property owned by duly registered coopera- commercial 80
tives; and industrial 80
(e) machinery and equipment used for pollution control
and environmental protection. (d) On special classes: the assessment levels for all lands,
4. Assessment levels, set by local ordinances, shall not buildings, machineries and other improvements
exceed the following levels: Actual use Assessment levels (%)
(a) On lands: cultural 15
scientific 15
% hospital 15
residential 20 local water districts 10
agricultural 40 government-owned or controlled
commercial 50 corporations engaged in the supply
industrial 50 and distribution of water and/or
mineral 50 generation and transmission of
timberland 20 electric power 10
2003 International Bureau of Fiscal Documentation